Order Types

Order types are the instructions you give your broker about how to execute a trade. The most common are market orders (fill immediately at the best available price), limit orders (fill only at your specified price or better), and stop orders (trigger when a price level is hit). In options trading, limit orders are the standard — market orders are almost always a mistake.

Why It Matters

Options have wider bid-ask spreads than stocks. A market order on an option with a $0.50 spread gives up $0.50 per share ($50 per contract) instantly. On a 10-contract trade, that is $500 lost before the position even starts working. Using the right order type — almost always a limit order — is the simplest way to improve your trading results.

Order type selection also determines fill speed, price certainty, and execution control. Understanding the tradeoffs lets you choose the right approach for each situation: urgency vs. price improvement.

How It Works

Market Order: Executes immediately at the best available price. For options, this typically means you buy at the ask and sell at the bid — the worst possible fill. Use market orders only when you need to exit a position urgently and price is secondary to speed.

Limit Order: You specify the maximum price you are willing to pay (buying) or the minimum you are willing to accept (selling). The order fills only at your price or better. This is the default order type for options. Start your limit at the mid-price (halfway between bid and ask) and adjust if needed.

Stop Order (Stop-Loss): Becomes a market order when the option or stock hits a specified price. Rarely used directly on options because wide spreads can trigger stops prematurely. More commonly used on the underlying stock to manage positions.

Stop-Limit Order: Combines a stop trigger with a limit price. When the trigger price is hit, a limit order is placed instead of a market order. Provides more control but risks not filling if the price moves past your limit.

Multi-leg orders: For spreads, straddles, and other multi-leg strategies, you should enter the entire trade as a single order. This ensures all legs execute simultaneously and you receive the net price you intended. Legging into spreads one contract at a time exposes you to execution risk.

Good practices for options orders:

1. Always use limit orders
2. Start at the mid-price and move toward the natural side (ask for buys, bid for sells) if you don't fill
3. Use "all-or-none" for larger orders if you need the full size
4. Enter spreads as a single order, not individual legs
5. Avoid market orders unless exiting an emergency

Quick Example

You want to buy a call option. The bid is $2.00 and the ask is $2.40. The mid-price is $2.20.

• Market order: You pay $2.40 (the ask). Instant fill but worst price.
• Limit at $2.20 (mid): You might get filled at $2.20. If not, bump to $2.25, then $2.30.
• Limit at $2.00 (bid): Unlikely to fill unless the option drops — you are competing with other buyers.

The $0.20 you save by using a limit at $2.20 vs. a market order at $2.40 is $20 per contract. On 5 contracts, that is $100 — a meaningful improvement.